CNO Financial Group Inc (CNO) 2010 Q1 法說會逐字稿

Good morning, my name is Andrea, and I will be your conference Operator today. At this time I would like to welcome everyone to the first quarter 2010 earnings results call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Mr Galovic, you may begin.

Thank you, Operator. Good morning, and thank you for joining us on Conseco's first quarter 2010 earnings conference call.

Today's presentation will include remarks from Jim Prieur, Conseco's CEO; Ed Bonach, Chief Financial Officer; Scott Perry, President of Bankers Life; and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several other business leaders available for the Q&A period.

During this conference call, we will refer to information contained in yesterday's press release. You can obtain this release by visiting the Company News section of our website at www.conseco.com. This morning's presentation is also available on our website, and was filed in a Form 8-K this morning. We expect to file our first quarter 10-Q and post it on our website on or before May 10th.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to yesterday's press release for more information about the forward-looking statements, and the related factors.

Today's presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You will find reconciliation of the GAAP measures with the non-GAAP measures in the appendix of the presentation.

One final note. Throughout this presentation, we will be making performance comparisons, and unless otherwise specified any comparisons will be referring to changes between Q1 2009 and Q1 2010.

And now I'll turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott.

We're very pleased to report Conseco's fifth consecutive profitable quarter, with results largely in line with expectations. Our net income for the quarter increased significantly year-over-year, and there were few unusual items. Our core sales continue to be strong, with first quarter core sales of $87 million, up 4%. At Bankers Life, our career distribution channel, total new annualized premium, or NAP, excluding PFFS and PDP, was $57.5 million, up 1%. At Colonial Penn, our direct distribution channel, total NAP was $13.1 million, up 7%. And at Conseco Insurance Group, our independent distribution channel, total NAP was $16.7 million, up 12%.

First quarter net operating income was $38.2 million, up 2% from a year ago. On a per share basis, net operating income of $0.14 was down compared to the first quarter of 2009. Keep in mind, however, that the current quarter includes the dilutive impact of the issuance of 65.9 million shares of common stock and 240.5 million of convertible debentures. By issuing those securities, we were able to significantly enhance our capital and support the Company's growth.

The combined risk-based capital ratio of our insurance subsidiaries, a measure of their financial strength, rose 10 percentage points to 319%. At quarter end, liquidity at the holding company was $131.2 million, and book value per common share excluding AOCL was $15.24 per share, compared to $15.14 at year end.

Last week we announced that we are splitting CIG into two segments. One business segment will be comprised primarily of closed blocks of business from Conseco Insurance Group. This segment will be called Other CNO Business or OCB. The second segment will be called Washington National, and will consist of our current and growing businesses at CIG. The OCB segment will be run by Chris Nickele, who will be responsible for managing the profitability of blocks of business that are no longer being sold or marketed by Conseco. These blocks of business account for about two-thirds of Conseco Insurance Group's capital, and produced a loss in 2009. Our current and growing business at CIG will be reported through Washington National, which will continue to be led by Steve Stecher.

The splitting of CIG's growing business, Washington National, from the closed blocks of business, OCB, is another step in our effort to increase the transparency of our operations, and to bring clearer accountability and focus on our business strategies. We expect to begin reporting on this new segment basis effective the third quarter of 2010.

Next up is our CFO, Ed Bonach. Ed?

Thanks, Jim.

Turning to slide six, selected premiums on a trailing fourth quarter basis declined as expected, primarily due to the termination of PFFS reinsurance contracts at Bankers, and a slight decline at CIG, primarily due to the impact of the 2009 reinsurance ceded to Wilton Re. The PFFS premium on this basis will run off by the end of the year. Our net operating income of $38.2 million equated to $0.14 per share, compared to net operating income of $37.5 million or $0.20 per share in the prior year. As Jim mentioned, the current quarter per share amount reflects dilution from the issuance of shares of common stock and convertible debentures.

For the first quarter, net income applicable to common stock was $33.9 million, which includes $4.3 million of net realized investment losses and loss on extinguishment of debt, compared to net income of $24.5 million a year ago, which included $13 million of net realized investment losses and loss on modification of debt. This equates to net income of $0.13 per share for the first quarter of 2010, including $0.01 per share of net realized investment losses, compared to net income of $0.13 per share a year ago, which included $0.07 per share of net realized investment losses and loss on modification of debt. Here again, the prior year's figures were based on the lower share count.

Turning to slide eight, earnings before interest and taxes, or EBIT, increased almost 10% to $79.2 million from $72.3 million in the first quarter of 2009. In our Bankers Life segment, pre-tax operating earnings were $53.2 million, up 19%. Colonial Penn's pre-tax operating earnings were $5.3 million, up 4%. In our Conseco Insurance Group segment, pre-tax operating earnings were $25.7 million, down 18%. We will cover the segment results in more detail later in the presentation.

The corporate operations segment includes our investment advisory subsidiary, and corporate expenses. Results for the first quarter of 2010 reflect the decrease in expenses of approximately $1.2 million, primarily due to a reduction in compensation-related accruals, and $2 million of income from consolidation of a variable interest entity beginning January 1, 2010, in accordance with new accounting requirements. Corporate interest expense reflects the higher interest rate paid on debt following the amendment to our credit facility in the first quarter of 2009. The results for the first quarter of 2010 included the recognition of $1.2 million extinguishment loss net of income taxes related to the repurchase of $64 million of our 3.5% convertible senior debentures. The results for the first quarter of 2009 included the recognition of $6.1 million in charges net of income taxes related to modifications made to our senior credit agreement.

Net realized investment losses in the first quarter of 2010 were $3.1 million. These net realized investment losses include total other than temporary impairment losses of $17.7 million, of which $20.3 million was recorded in earnings, with the balance accumulated other comprehensive loss. Net realized investment losses in the first quarter of 2009 of $6.9 million included $92 million of other than temporary impairment losses recognized in earnings. Net realized investment losses in the first quarter of 2009 also included a $2.4 million increase to the deferred fax valuation allowance. Eric Johnson, our Chief Investment Officer, will address this in more detail later in our presentation.

Slide nine shows our trailing fourth quarter's operating return on equity. Operating income for ROE excludes changes to the deferred tax asset valuation allowance, losses related to the senior health transfer, and gain or loss on the extinguishment or modification of debt. Our equity base for operating ROE excludes both AOCL and the value of net operating loss carry forwards. ROE on a trailing fourth quarter's basis increased to 6.2% from a year earlier, reflecting our improved earnings over the last year. We expect to further increase ROE by improving underperforming legacy blocks through management of non-guaranteed elements, layering on of new, more profitable business, and through additional operational efficiencies and expense reductions. Splitting CIG into two segments will provide more line of sight into these improvements.

First quarter 2010 net operating EPS decreased to $0.14 per share versus $0.20 per share a year earlier. As indicated before, the [turn] quarter per share amount reflects dilution from the issuance of 65.9 million shares of common stock and $240.5 million of convertible debentures.

Turning to slide 11, book value per common share, excluding AOCL, increased to $15.24 from $15.14 at December 31, 2009, primarily reflecting Q1 2010 earnings. As you can also see from this slide, AOCL decreased from $264 million at year end 2009 to $103 million at the end of the first quarter of 2010.

As indicated earlier, our consolidated RBC ratio increased in the first quarter by 10 points to 319%. The increase was primarily driven by statutory operating income, with statutory capital increasing by approximately $44 million in the quarter.

And now I will turn it over to Scott Perry, President of Bankers Life, to cover that segment's results. Scott?

Thanks, Ed.

For the quarter, Bankers' earnings were $53.2 million, a 19% improvement over the prior year. Results for the first quarter of 2010 compared to the same period of 2009 reflect the following three items. An increase in earnings of approximately $7 million from our Life products, resulting from favorable mortality of approximately $5 million, more than offsetting the lost earnings of approximately $3 million on blocks reinsured in 2009. Also, Q1 2009 life results were impacted by a one-time reserve increase of $5 million. Second, higher PDP and private fee for service income of $3 million, due to favorable IBNR development and higher PDP margins. And lastly, steady earnings from our long-term care products in the first quarters of both 2010 and 2009.

Results in Q1 of 2010 reflected improved operating performance, while Q1 in 2009 reflected an increase in earnings of approximately $11 million of earnings from the release of insurance liability from lapsed policies following rate increase actions. Sales for the quarter, excluding private fee and PDP, were $57.5 million, up 1% compared to last year, and were highlighted by double-digit sales growth in both our Life and Long-Term Care lines. The total agent force has remained stable as compared to the prior year, and while our new agent recruiting has seen a slight decline, this has been offset by improved agent productivity and retention, as prior year recruits transition to veteran status.

The next slide has more details on our sales results. Modest first quarter sales growth of 1% was driven by strong Life sales, up 25%, and Long-Term Care sales, up 14%. These increases were mostly offset by a decrease in fixed annuity sales of 25% versus the prior period, which is consistent with the fixed annuity industry trends, and is largely due to the current interest rate environment. While the Med Supp sales growth over the prior period of 5% is average for the quarter, when compared over the past two quarters sales are up 64%. Slide 15 has more details on the relevance of this two quarters' view.

Due to Bankers not assuming any risk on Med Advantage for 2010, we are now excluding these sales from all prior periods, as well as PDP sales, due to the lack of comparable economic value. This chart shows issued policy counts for Medicare Supplement, Med Advantage and PDP from the fourth quarter of 2009 to first quarter of 2010, as compared to the prior year. Comparing policies sold over a two-quarter period reflects reporting differences of Med Advantage products versus traditional Medicare Supplement. As discussed in last quarter's call, Med Advantage policies sold during the annual election period from November 15th through December 31st are reflected in the first quarter of 2010.

You can see that over this two-quarter period, Medicare Supplement policies have increased by 79%, while Med Advantage has increased by 15%. The successful sales results for both of these products is a good indication of the health of the career distribution network, as these new households will provide future cross-sell opportunities. The dropoff in stand alone PDP is attributed to a shift in sales strategy and the increase in MA/PDP combo offerings.

Lastly on slide 16, we see the impact of the items previously discussed, producing an ROE on a trailing four quarters' basis of 11.8% for Bankers.

Now I will turn it back over to Ed to cover Colonial Penn and CIG results. Ed?

Thanks, Scott.

Turning to slide 17, Colonial Penn's earnings were $5.3 million, a 4% increase, driven primarily by favorable mortality. Life sales for the first quarter were $13.1 million, an increase of 7% from first quarter 2009. As we previously communicated, during 2009 we reduced our advertising spending as part of our capital management initiative. We have returned to investing in those lead-generating activities in 2010. During Q1 2010, these programs experienced a 32% increase over a year ago, and a 76% increase over the fourth quarter of 2009. Turning to the next slide, we see that Colonial Penn's trailing fourth quarter return on equity of 14% continues to be in its targeted range.

Looking at CIG results on slide 19, overall NAP increased by 12% over the first quarter of 2009, which is the third consecutive quarter of positive sales comparisons. We had sales growth in both the CIG sales and PMA channels, driven in part by strong recruiting results. As indicated earlier, CIG's earnings were $25.7 million for the quarter, down 18% from Q1 2009. The results were impacted by lower Specified Disease income of $5 million, as Q1 2009 was favorably impacted by a reserve release. They had lower Life income of $5 million, due primarily to the Wilton Re reinsurance agreement, and higher annuity income of $6 million due to the return to more normal surrender levels on our indexed annuities.

Slide 20 illustrates the targeted shift in CIG's sales mix, with Specified Disease sales up 28% over Q1 2009, and Life sales up 67%. Worksite Universal Life sales were a strong contributor to this growth. Worksite sales results continued to gain momentum, with new worksite groups up 64% over the first quarter of 2009.

Slide 21 summarizes CIG's operating earnings by period.

And now I will hand it over to Eric Johnson, our Chief Investment Officer, who will discuss the CNO investment portfolio. Eric?

Good morning, Ed, and good morning, everyone.

In the first quarter we earned investment income of $315 million, compared to approximately $309 million in the fourth quarter of last year. Our portfolio generated an earned yield of 5.76%, compared to 5.66% in the fourth quarter. Our earned yield improved due to higher yields on new investments, which were 6.21% compared to 5.15% in the fourth quarter of last year, and the effect of call premiums paid by issuers and early redemptions. During the quarter, we continued to balance income with capital preservation. Here is what we have been buying -- senior CMBS, carefully selected jumbos and Alt-As, investment grade corporates, a limited amount of corporate high yield, and some taxable municipals, including [BAS].

Slide 22 presents realized gains and losses in the first quarter, and for a trailing number of quarters. As you've heard, we recognized roughly $51 million in gains, offset by roughly $35 million in realized losses, as well as roughly $20 million in other than temporary impairments recognized in earnings.

Let's go on to slide 23. Slide 23 presents our unrealized gain/loss position. Quarter over quarter, our unrealized loss continued to grind lower, lower being better, invested of $140 million at 3/31, compared to roughly $440 million at 12/31/2009. That basically resulted from tightening spreads in pretty much every sector of the credit market, and particularly in structured securities over that period.

Let's go on to slide 24, which shows first quarter impairment losses. In the first quarter, commercial mortgage loan impairment totaled roughly $11 million, in line with our expectations. Due to an increase in cumulative loss expectation for certain residential mortgage-backed securities, we recognized impairments of $5.7 million.

Let's go on to slide 25, which illustrates our asset allocation and related mark to market trends. Our asset allocation was substantially unchanged in the first quarter.

Slide 26 shows our invested assets by rating. As you can see, our below investment grade ratio was essentially unchanged at approximately 7%; actually it is somewhere closer to 6.5%. The pace of downgrade slowed during the first quarter, reflecting overall economic end market trends.

Going on to slide 27, slide 27 shows Alt-A securities represented approximately 1% of invested assets at 3/31. Our Alt-A portfolio continues to reflect better than average quantitative and qualitative characteristics, and significant credit support, and most of the securities held we at -- on origination, super-seniored. It also reflects significant delinquencies. We analyze Alt-As by performing securitization level projections of cash flows, using and market-consistent assumptions for defaults, severities, recoveries, prepayments, et cetera. We do -- based on our analysis, we expect to fully recover our carrying value, and we will continue to monitor this segment very closely.

Going on to slide 28, slide 28 summarizes our prime jumbo investments, which represent approximately 2.8% of invested assets. You will remember that in the fourth quarter last year, due to some unfavorable delinquency trends, we increased our cum loss expectations on many jumbos. During the first quarter, we did not consider any further adjustments needed. We are satisfied with the ongoing performance of this allocation.

Slide 29 is about CMBS, and it breaks down our CMBS exposure by vintage. This portfolio has very significant seasoning, and it is also highly rated, approximate -- a very high percentage in the AAA and AA categories. Rising delinquencies for the CMBS market as a whole are a reality, and they are reflected in this portfolio. However, the delinquency rate of our CMBS collateral is approximately 3%, compared to slightly north of 5% for the market as a whole, and recent mark to market trends have certainly been favorable here.

Let's go on to slide 30, which shows that our CMBS exposure has significant credit support compared to delinquency performance. We analyze CMBS by performing securitization level projections using market consistent assumptions. We believe this portfolio has sufficient credit support to produce the expected earnings and cash flows.

Let's go on to slide 31, which is about commercial mortgage loans. Slide 31 breaks down that allocation by vintage and property type, and it provides some high-level summary statistics. It's about $1.9 billion, which is about 9% of invested assets. It's over 400 loans, and it is closer to 500 loans, actually. The average loan [size] of around $4.5 million, a very small number of larger loans, and very large number of small loans. We recognize, as I said earlier, roughly $11 million in first quarter impairments, which was in line with our expectations. That affected three loans, two of which are being sold, and will reduce to contracted sales value. There hasn't been much change in the performance of this portfolio in recent months or, in fact, in recent quarters. This is probably not the end of delinquencies, but we do expect future losses will continue to be manageable in amount.

As general statement, aspects of the economy have returned to a condition of expansion, and spread to most sectors, while having widened a bit slightly recently and are pretty still tight. The current level of investable yield reflects strong demand for risk. However, as the first quarter demonstrates, we are continuing to generate yields on new investments which are consistent with the Company's earning objectives.

And with that, I will turn it back to Jim.

Thanks, Eric.

To summarize, we continue to generate solid operating earnings. It's our fifth consecutive quarter with net income, as I said before, and our core sales and lead generation continue to be strong. With respect to health care reform, we anticipate the impact to our business to range from minimal to slightly positive. We will continue to monitor the impact that the legislation might have on our sales of Medicare products, and we believe that the legislation will probably create additional opportunities for sales of other supplemental health products, as coverages are reduced under some health plans.

The demographics of Conseco's target market are very attractive. As result of the Baby Boom, the number of Americans turning 65 each year will grow by nearly 4% per year over the next decade. The first of the Baby Boomer population will become Medicare eligible next year, and in ten years number of people 65 years and older will have increased by 50%.

The new segment, OCB, that we have just created will help sharpen the focus of improving the results of the underperforming older blocks of business. In the meantime, we will continue to work to expand the sales growth across all of our sales channels.

As we announced in March, we are asking shareholders at next week's annual meeting to approve a change in the holding company name to CNO Financial Group. This name change reflects the profound transformation of Conseco over the past three years, including our significantly improved financial stability and refocused business strategy. We have recapitalized the Company to reduce debt, increase liquidity and capital, provide more flexibility to weather economic storms, and enhance our ability to grow profitably. We've streamlined our Company to focus on businesses where we have a true competitive advantage, and we've become customer-focused rather than product-driven. The name change separates the identity of the holding company as an investor brand from the identities of our operating insurance companies, but it will not affect the Company's ownership structure or insurance business operations. Having said that, we do look forward to talking with you at our next earnings call as CNO Financial Group.

And now we will open it up for questions. Operator?

(Operator Instructions)

You have a question from the line of Randy Binner.

Thank you. I think this question is probably for Ed or maybe Jim. But on page 35 of the slide deck, the interest coverage was a little bit lower than I think we had anticipated. Just wondering kind of if there is a story there? If there is any kind of one-time nature to that, and how you might see that coverage ratio trending going forward?

Yes, thanks, Randy. This is Ed. This is a covenant and metric that we actively can and do manage. It is really just measured at the holding company, with amounts coming up counting towards the ratio, and no substraction for any amounts contributed back down into insurance companies. So we just will manage it to stay on side with the covenant, and feel confident that we can continue to do that. So nothing extraordinary in the quarter.

Okay, great. And then on the Washington National piece of the split off of CIG's good bank and bad bank, if you will, I was just hoping you could clarify for me and maybe some other callers exactly which business lines are in Washington National, if that is most of the supplemental health business and just remind us where the PMA distribution platform is housed, relative to Washington national or to OCB?

Washington National basically includes all the business that we were currently actively selling. So PMA is selling mostly Supplemental Health but also some Life, and we are selling other products through other distributors. So all of the new sales are coming through Washington National. The bulk of OCB is older life blocks and annuities.

Perfect. So it's all new sales. And then I guess what's the plan with OCB? Is it to try and get re-rates and kind of create a better profitability stream there, or are you looking near term to try to maybe offload some of those runoff blocks?

Essentially it's to improve the operating performance. And as you might imagine, running OCB is very different than running Washington National, and the focus is more on making sure that we maintain service levels, but we keep the costs down and low and, of course, non-guaranteed elements that we have, that we work on the opportunities to improve the prices where it's appropriate to do so. So that's really going to be the focus of the management team at OCB. I mean, it's not that we weren't doing that in the past, but by splitting it up it would become much more obvious what the new businesses contributing versus what -- how the old block is doing.

Yes. The other thing I would add is a very similar to some other blocks we've had that were in runoff, where we can pursue the non-guaranteed element changes, it's in our best interest and the shareholders' best interest to do that, because if we did seek to offload through a sale or reinsurance, we would not get paid for that, and the reinsurer would go and do it exactly what we we're pursuing. So we feel that is the best track on virtually all of these blocks, is to pursue the non-guaranteed element changes that we can obtain.

The other thing I would add is to that is that it will take us some time to get the full reporting setup with the history as well, to be able to show that to the market. In the meantime, we will be managing the businesses separately.

Great. Thank you. Just one more follow-up. Do you have a rough estimate what you think the trailing 12-month ROE is for the Washington National split up?

The only thing we've said so far, you know, until we actually show you the financials, is that the OCB segment produced a loss last year. And so that means you can take all of the CIG profits, and perhaps a little bit more, and apply it to the -- approximately one-third of the CIG capital, to figure out what the a rough return would be on Washington National.

Okay. Great. Thank you.

You're welcome.

Your next question comes from the line of Alec Ofsevit.

Good morning, guys.

Good morning.

So two questions. My first one on statutory earnings, I saw you reported about $25 million of net income, and just curious how you see that trending for the rest of the year? I know back in the 10-K, you were planning to take out about $105 million in dividends over the course of the year, so I'm curious if you think you are on track for that?

My second question is on the investment side, and it's nice the new money yield pick up with the CMBS and some RMBS, I'm just curious about the RBC impact of buying structured securities, given current credit ratings, and whether or not you can factor in the purchase price or PIMCO's re-rating?

Alec, this is Ed. I will try to respond, actually, to both of those, but then have Eric add on. The statutory income that you cited is all-in number, that we look at the operating net income, excluding investment gains and losses, and it largely tracked with expectations. Our income on a statutory basis we expect to be in line, in track with our GAAP income. However, compared to 2009, we would expect our statutory income to be somewhat less. First of all, because we're investing more in the business, we're retaining more of the business as opposed to reinsuring different parts. And then, of course, we did reinsure two blocks of business, one one out of CIG last year and one out of Bankers that will also reduce statutory income, as we have indicated, on GAAP as well.

As far as the RBC, we certainly factor in the capital considerations into the investments that we acquire and purchase. We, you saw, increased RBC in the first quarter by ten points, while at the same time investing into some of these asset classes that you mentioned; so that we believe our statutory earnings power and capital generation can withstand the additional investments that we're making in some of these asset classes, and still grow capital on an absolute and relative basis.

Yes, if you look at it kind of, speaking generally, here in the context of puts and takes in a sense, we buy something and we sell something, by and large, from an RBC perspective, you come to basically no effect largely for the quarter. And the reason for that is, just looking back over what I described earlier, for example with the CMBS, what we have been purchasing has been predominantly originally AAA-rated securities, most of which would still be very highly rated, if not AAA certainly high in the A category, so that will have no RBC effect. As I mentioned, we purchased a lot of investment grade corporates, certainly taxable munis will be highly rated and in the investment grade category.

I think I mentioned RMBS; now, I will say that substantially everything we have done there has also been currently investment grade-rated, and purchased at a price at which, using the current NEIC model, you are getting an [NNA IC1] treatment, regardless of the NRSRO rating. So I think we have done a reasonably thoughtful job of focusing on earning yield, while at the same time protecting RBC and capital, and I think that will -- the future will bear it out, but I think we're off to a good start this year.

Great. Thanks for the detail.

You're welcome.

Your next question comes from the line of Paul Sarran.

Good morning, I would like to start with one question on CIG, and then I think a follow-up on the investment numbers you just gave. But on CIG, I wanted to ask is there a meaningful secular improvement, for lack of a better word, from the runoff block from Q4 to Q1, responsible for this meaningful rebound in earnings? Or is it more simply that last quarter there were several items that went against you that were somewhat random in this quarter? They were either more normal or slightly favorable?

On CIG, Paul, I would say definitely a year ago CIG was negatively impacted by about $6 million of additional intangible write-offs, because we had higher surrenders on an indexed annuity block that had a market -- that has a market value adjustment. So one part, secular meaning where Treasury interest rates were and, of course, first quarter of 2009 there was still considerable market turmoil, and these were annuities sold through independent distribution, so surrender activity picked up and we wrote off additional intangibles. Those surrender levels have returned to more historic normal expected levels, actually a little better than that. So that really was a main -- one of the main contributors to CIG's improvement in earnings, if you look year-over-year.

If you are comparing it, Paul, to last quarter, last quarter we did point out that there were a number of negative things that happened in CIG that we thought were nonrecurring.

Including some regulatory legal settlements that CIG bore the brunt of in Q4.

Right. So last quarter the legal and regulatory, backing that out, CIG earnings were still in the single digits, and I know there was a big unlocking as well. So I guess my question is, you know, do we just see better improvement -- better improvement this quarter suggests that we will see better improvement going forward? Or are you still subject to that random volatility in earnings? Could there be more sizable unlockings? Are they just as likely next quarter as they were last quarter?

I will say on the likelihood that's hard to comment on definitively. Over time, as we split CIG into OCB and Washington National, OCB would have the blocks that are in loss recognition currently, which is largely the interest-sensitive Life block. In general, we did see an improvement in Q1 of this year in the underlying experience, mortality, persistency in particular; could that reverse in future periods and cause an unlocking? Yes, but we have set the amortization and the intangible levels to a point where it should absorb reasonable mortality and reasonable lapses, given our experience.

Now that said, over time, as we are able to get the non-guaranteed element changes and increase in essence prices, and -- those will add to the zero margins we have on those blocks right now, so over time we will build in margin which would reduce the likelihood of the unlockings. But that will be a many quarter process, but we will build that margin over time a quarter at a time.

Thanks. That's very helpful. And then I don't want to take up too much time, but Eric, maybe, could you comment on the vintages that you are buying and CMBS and RMBS, and if you can, also prices relative to par values of what you purchased in the quarter?

I can certainly do the former. On the latter I can make a general statement, and then -- which will probably be in the range of correct.

But on the CMBS, we will start there, it's funny because when we first kind of got out of the block early in the quarter, I kept seeing a lot of 2006 and 2007 on the blotter every day. And we very quickly decided that while that was providing -- we thought very good yield and good safety, that just diversification has a certain value, and as the quarter went on we worked very hard to look for paper with a little more seasoning. So by the end of the quarter, I thought we had achieved a good balance through the quarter of having new purchases be 2004 and 2005, 2006 and 2007, across the board. With regard to RMBS, a similar pattern as well, although a little less obvious, but by the end of the quarter a very similar result.

In terms of purchase prices, we -- a general statement, we are not very big on amortizing premium. We really like buying discounts. And so you -- in general in all of these areas, we are buying bonds that we are buying at discounts to face value. Now, because we are buying paper that's pretty highly rated, these are not -- we're not buying $0.50 paper or $0.60 paper, you're buying stuff here that is going to be trading in the 80s and 90s for the most part, in pretty much all of those areas.

Thank you.

You're welcome.

(Operator Instructions)

Your next question comes from the line of Randy Binner.

Okay, great. I assume that the CIG consolidation was not in the current quarter's RBC ratio? Could you please confirm that, and any commentary on that -- the probability of that happening this year would be helpful?

Yes, Randy. Just to clarify, you're referring to the legal entity insurance Company's merger of Washington National with Conseco Insurance Company and Conseco Health Insurance Company. We do expect that legal entity merger to be completed by the end of the year. It is not reflected in the Q1 RBC or any other results; they are still three separate legal entities, but we do expect that to be completed by the end of the year.

What is the cause of delay there?

We need regulatory approvals, and that is a process that we can't totally control. So it's a matter of providing information, responding to questions, and that back and forth is a time-consuming endeavor at times.

On the NAIC, and it's not really the NAIC as much as maybe a couple of States that are proposing a higher universal base rate to be held against commercial mortgages; I would just be interested in Eric's or Ed's comments on the impact that could potentially have on RBC? Moody's put out a report that indicated kind of a rather high impact for a lot of companies, but they maybe didn't reflect co-variance and other offsets. So I would just be curious to what, I guess, A, what you think of that proposal, and B, if you could quantify any potential RBC impact?

This is Eric, and this is an interesting topic, and obviously a ball that is yet to land ultimately where it's going to land, both in regard to CMBS, in regard to getting -- across-the-board in the securitized area, there will be continued flux in rating practices as well as RBC practices, and I think this is just something we will have to manage over time. Some of that flux will be beneficial to us. For example, in the coming, the rest -- across the year, there is a lot of talk about extending what people call this [PIMCO] process into other areas of secure-type product, where you didn't get that effect at the last year end into CMBS and other areas, and you probably know that, and since that's about 4% of our assets there would be some pick up there for us.

On the other hand, with regard to commercial mortgage, I think we will give back some of the benefit we got at this last year end, and through a variety of applications. I think our current estimate is that it's probably about 8 to 10 RBC points, based on what we are hearing and looking at right now. So it's not lethal or deadly in any sense, and certainly manageable, but it is something that we are keeping a careful eye on.

And I would say to add to that, Randy, is in general from the insurance company standpoint, management standpoint, we would prefer more uniformity in the States; to manage to one-offs is challenging, it's confusing at times to different audiences, and shareholders included.

And the other thing is that dealing with temporary solutions are also difficult, because it's hard to make decisions on a longer-term horizon if you only know what the requirements are or the rules are for a calendar year. So it provides some challenges, but as Eric said, nothing we are aware of is so significant that it's causing undue concern.

Okay. Great. I will ask one more because I got back on so fast. On Bankers, the long term care benefit ratio seemed, I would say, elevated, maybe kind of at the outer end of the normal range of volatility. Just wondering if there is any color on what was occurring there?

Randy, this is Scott Perry. Really, the 114 is within our expectations. It's important to note that the comparative to last year was impacted to -- by the ALR releases that were related to the [shock] lapses due to the rate increases that we implemented last year. So the 114 is within the range, within expectations as this block ages.

Okay. So nothing unusual in the quarter there?

No.

Okay, fair enough. Thank you.

Your final question comes from the line of Dwain Carryl.

Good morning. I was wondering if -- I guess two things. One, the stat earnings number that you alluded to, which you said was close to the GAAP number. Does that include -- is that net of security losses? Or is that --

This is Ed. You know, in the supplements the $44 million number does not include the investment losses. The net realized capital losses on a consolidated basis in Q1 of 2010 were $13.5 million, which gets to a consolidated net income of just under $26 million, and that's on page 14 of the supplement.

Perfect. Thanks. And I was wondering if, given the strength of the quarter, you've had any dialogue with the rating agencies, and if they had any response?

We have dialogue with the rating agencies at least every quarter. We do have a positive outlook currently from Moody's. Generally you don't stay on positive outlook for too many quarters; either you get upgraded or it goes to a stable outlook. We would think that helps to support more of the positive movement than anything else. The -- S&P did already did upgrade us a couple of notches. [AMS] recently did improve their outlook.

So we are seeing positive movements in general, but the rating agencies each do their independent process, and their timing then is different between rating agencies.

Thanks a lot.

And there are no further questions at this time.

Thank you, Operator, and thank you everyone for being on the call and for your interest in Conseco.

Thank you for your participation. This concludes today's first quarter 2010 earnings results call. You may now disconnect.